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CHAPTER 23

Risk Control

Atrading system alone will not assure success without proper risk control, beginning with individual trades, extending to diversification of markets, and continuing until a portfolio of different trading strategies is created. Every trading style has losing streaks that will ruin an investor who begins trading at the wrong time without adequate capital; therefore, the size of the position, the markets to trade, and when to increase or decrease leverage become important for financial survival. Some risks, called systematic risk, can be controlled or reduced while other market risk, which can take the form of a price shock, can never be eliminated.

This chapter covers a broad range of topics related to risk, including individual trade risk, portfolio risk, leverage, and a continuation of the effects of price shocks and catastrophic risk. It is not possible to say that one is more important than another. In a specific situation, any one of the areas discussed may be the answer to preventing a substantial loss. The first part of this chapter discusses capitalization and shows why many traders are successful for months and then lose everything in only a few days. It explains the choices in dynamic leveraging and offers alternatives of less risk. The last section analyzes when a system is performing properly and when it is not living up to its expectations.